Cash Flow 101
In business, positive cash flow isn’t just important, it’s vital to the success of a company. While profit measures revenue after expenses, cash flow measures the inflow and outflow of cash, and the ability to settle debts and expenses at a given time.
Positive and Negative Cash Flows
Businesses achieve positive cash flow when cash generated through accounts receivable and sales is greater than cash flowing out of the business for accounts payable and other monthly expenses. Positive cash flows ensure that businesses have enough money to compensate employees, purchase supplies and materials, pay off taxes, and grow the business. When businesses have a greater outflow of cash, they may experience a negative cash flow. This can happen for a number of reasons, including excessive business expenses and poor cash flow management.
In this post, we’ll cover a few tips you can use to improve your business’s cash flow.
Tips for Managing Cash Flow
1. Conduct a break-even analysis
Effective cash flow management begins with planning and measuring, typically with a break-even analysis. Your business’s break-even is the point when revenue equals costs to revenue, neither a profit nor a loss. The break-even point represents the bare-minimum target for early businesses to ensure they stay operational. Once this figure is determined, processes can be streamlined to achieve greater profitability and cash flow.
2. Prioritize cash flow over profitability
Cash flow and profitability tend to be used interchangeably, but leaders need to be more concerned about cash flow. Companies with strong cash flow will eventually become profitable, as they will have enough business circulating to continue operations. But even if companies are profitable, if they have negative cash flow, they won’t last long. Startups need to remember that long-term sustainability is far more important than big gains early on.
3. Collect accounts receivable quickly
Send invoices and bills to your customers as soon as possible. Friendly reminders are acceptable if they don’t respond immediately, as late payments could become frequent if expectations aren’t set from the start. The longer you wait to receive a payment, the less likely you may receive what is owed.
Consider making it easier for customers to pay, either with a payment platform or by offering alternative payment methods (such as a credit card option). Discounts or deals may also encourage customers to be more timely with payments.
4. Extend payables, cut expenses
Cash outflow is just as important as inflow. The fewer debtors and expenses a business has, the more money they have at their disposal. When it comes to payables, sometimes it’s best to negotiate a later pay period (30 days or even 60 days) so that money can be allocated towards more pressing costs like employees and software.
Business expenses should also be taken into account- what is the bare minimum a business needs to survive? Expenses such as large offices can be foregone for more cost-effective approaches like coworking spaces.
5. Create a cash reserve or business savings account
Even with efficient processes in place, sometimes unforeseen events like a recession can drastically set your company back. With reserved cash, businesses have greater flexibility in their decisions and a safety net in case of emergencies. While building this reserve may take time and effort, such an initiative can give a business more confidence and strength.
6. Incorporate more efficient technology
21st-century technology has dramatically improved accounting efficiency and analysis. Software like Quickbooks promises ease of use and detailed insights, while websites like Bonsai make it easier for freelancers to invoice and set up contracts. Take full advantage of these additional features to reduce bottlenecks and inefficiencies while doubling down on your most profitable initiatives.
For more resources, check out Entrepreneur’s list of the best apps to help forecast and manage cash flow.
7. Separate personal and business finances
Business leaders may be tempted to combine personal and business expenses, especially in startups. Even if the business is started or partially funded by the owner, it’s best to maintain separate accounts and records for personal finances. Mixing the two could lead to inflated revenue projections, or underestimated expenses.
Cash flow is vital to the survival of a business. Running a business with negative cash flow is like driving a car with a leaking gas tank. You may be heading the direction you intended, but you won’t last long out there before the car breaks down. Profit may sound attractive to investors, but cash flow can help secure the future of your business.
Another way to improve cash flow is by improving productivity. The more efficient your business, the more money it can generate with the same amount of staff/resources.
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